3 Simple Risk Management Rules to Stop Losing Money on Tesla

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…or any stock, commodity or currency for that matter.

Risk management is crucial. It’s the difference between growing and exploding an account and how fast.

There is the saying 90/90/90; that 90% of traders lose 90% of their money in 90 days, maybe faster. Broker stats published here in the UK, where I come from, confirm this, and I think that would be a fairly accurate overall representation as well.

But before you can even consider risk management, which is one of the last pieces of the investment puzzle, you need to have the ability to pick high-probability stocks.

Trade with an edge: Impeccable risk management skills will never replace mediocre stocks, so unless you adopt an analysis process that identifies stocks with proven advantage, your portfolio will always struggle to gain traction.

An edge is where you are more likely to make a profit than a loss. There’s a saying that if you can’t define your edge, you don’t have one. And if you don’t have a benefit, you’ll be eaten by someone who does. Remember, as we play on probabilities, never on certainties, even an edge can fail, and that’s where risk and exit management comes in.

It repeatedly acts on a proven advantage where profits far outweigh losses and how accounts are increased.

Tesla Stock Analysis: So the first question you need to ask yourself: Tesla Inc. TSLA ready to invest now or even the right stock to invest in?

This is the basis. If you’re struggling to define a benefit, I break mine down in detail in this article.

So let’s say you have strong skills in identifying assets with an advantage, but you’re not very good at translating that into profit; Well, you’re an analyst, not an investor. People don’t often like to hear this, but these are the facts. It’s a choice to put the ego on profits that won’t help your end goal, wealth creation.

This suggests that you can screen for good stocks, an analyst skill set, but you haven’t quite mastered the investor skill set to extract profits. The good news is that it can be learned, and the best techniques are indeed simple to learn. The challenge is to find the correct information suitable for everyday busy people and then execute it consistently daily.

Investor skills include understanding how to:

  • Calculate optimal entry points
  • Place stop losses so as not to cut too soon
  • Manage risk to protect your capital
  • Compound to accelerate profits
  • Trail price to exit at the end of the trend
  • Be patient for maximum gains

These rules should all be spelled out in your trading plan to eliminate subjectivity and emotion. The more mechanical you make the process, the better your outcome will be. You will also let the price and history of the asset guide you as opposed to your beliefs and opinions.

So what are these three simple rules of risk management?

I break them down as follows:

  • Maximum risk per position: typically 1% to 2% depending on market conditions
  • Maximum risk per day: usually 4% to 8%
  • Maximum risk spread: typically 10% to 20%

Which end of the above ranges I choose depends on market conditions. If the indices have no direction as they currently do, but my scanners pick stocks that are outperforming the indices such as McKesson Corporation MCK, which I shared in this recent article, I will err on the side of caution. If the markets are in full bloom, I’ll go all out.

These rules have served me very well since 2007, when I started investing. They allow me to focus on capital protection, the mark of a good investor, and by acting on a proven edge, profit comes to me.

A good investment is simple but not easy. Learning from my early mistakes and experiences, and spending time adopting what really works, especially staying true to the principles of long-term investing, means being rewarded exponentially. Compound growth is a magic that few know about.

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